Financial marketing

129 PART THREE FUNDAMENTALS OF FINANCIAL INSTITUTIONS 175 8 Why Do Financial Crises Occur and Why Are They PART FOUR CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY 225 PART SIX THE

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Contents in Brief

PART TWO FUNDAMENTALS OF FINANCIAL MARKETS 77

3 What Do Interest Rates Mean and What Is Their Role in Valuation? 77

5 How Do Risk and Term Structure Affect Interest Rates? 129

PART THREE FUNDAMENTALS OF FINANCIAL INSTITUTIONS 175

8 Why Do Financial Crises Occur and Why Are They

PART FOUR CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY 225

PART SIX THE FINANCIAL INSTITUTIONS INDUSTRY 425

17 Banking and the Management of Financial Institutions 425

21 Insurance Companies and Pension Funds 540

22 Investment Banks, Security Brokers and Dealers,

PART SEVEN THE MANAGEMENT OF FINANCIAL INSTITUTIONS 594

CHAPTERS ON THE WEB

Contents in Detail

PART ONE INTRODUCTION

Central Banks and the Conduct of Monetary Policy 47

How We Will Study Financial Markets and Institutions 49

Internationalization of Financial Markets 60 International Bond Market, Eurobonds, and Eurocurrencies 60

GLOBAL Are U.S Capital Markets Losing Their Edge? 61

Function of Financial Intermediaries: Indirect Finance 62

FOLLOWING THE FINANCIAL NEWS Foreign Stock Market Indexes 63

GLOBAL The Importance of Financial Intermediaries Relative

to Securities Markets: An International Comparison 63

Increasing Information Available to Investors 72 Ensuring the Soundness of Financial Intermediaries 72

PART TWO FUNDAMENTALS OF FINANCIAL MARKETS

Chapter 3 What Do Interest Rates Mean and What Is Their

MINI-CASE With TIPS, Real Interest Rates Have Become

The Distinction Between Interest Rates and Returns 91 Maturity and the Volatility of Bond Returns: Interest-Rate Risk 94

MINI-CASE Helping Investors Select Desired Interest-Rate Risk 95

CASE Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect 120

CASE Changes in the Interest Rate Due to a Business Cycle Expansion 122

CASE Explaining the Current Low Interest Rates in Europe, Japan,

THE PRACTICING MANAGER Profiting from Interest-Rate Forecasts 124

FOLLOWING THE FINANCIAL NEWS Forecasting Interest Rates 126

CASE The Global Financial Crisis and the Baa-Treasury Spread 133

CASE Effects of the Bush Tax Cut and the Obama Tax

FOLLOWING THE FINANCIAL NEWS Yield Curves 138

MINI-CASE The Yield Curve as a Forecasting Tool for Inflation

CASE Interpreting Yield Curves, 1980–2016 149

THE PRACTICING MANAGER Using the Term Structure to Forecast Interest Rates 150

Evidence on the Efficient Market Hypothesis 161

MINI-CASE An Exception That Proves the Rule: Raj Rajaratnam and Galleon 162

CASE Should Foreign Exchange Rates Follow a Random Walk? 164

Overview of the Evidence on the Efficient Market Hypothesis 167

THE PRACTICING MANAGER Practical Guide to Investing in the Stock Market 167 How Valuable Are Published Reports by Investment Advisers? 167

MINI-CASE Should You Hire an Ape as Your Investment Adviser? 168

Do Stock Prices Always Rise When There Is Good News? 169 Efficient Markets Prescription for the Investor 169 Why the Efficient Market Hypothesis Does Not Imply

CASE What Do Stock Market Crashes Tell Us About the

PART THREE FUNDAMENTALS OF FINANCIAL INSTITUTIONS

Basic Facts About Financial Structure Throughout The World 176

Contents in Detail 13

How Transaction Costs Influence Financial Structure 179 How Financial Intermediaries Reduce Transaction Costs 179 Asymmetric Information: Adverse Selection and Moral Hazard 180 The Lemons Problem: How Adverse Selection Influences

Tools to Help Solve Adverse Selection Problems 182

How Moral Hazard Affects the Choice Between Debt and

Moral Hazard in Equity Contracts: The Principal–Agent Problem 187 Tools to Help Solve the Principal–Agent Problem 188 How Moral Hazard Influences Financial Structure in Debt Markets 190 Tools to Help Solve Moral Hazard in Debt Contracts 190

CASE Financial Development and Economic Growth 194

CASE Is China a Counter-Example to the Importance

What Are Conflicts of Interest and Why Do We Care? 197

MINI-CASE Credit-Rating Agencies and the 2007–2009 Financial Crisis 200 What Has Been Done to Remedy Conflicts of Interest? 200

MINI-CASE Has Sarbanes-Oxley Led to a Decline

Chapter 8 Why Do Financial Crises Occur and Why Are

Agency Theory and the Definition of a Financial Crisis 207

CASE The Mother of All Financial Crises: The Great Depression 211

Debt Deflation 213

CASE The Global Financial Crisis of 2007–2009 214

Causes of the 2007–2009 Financial Crisis 214

MINI-CASE Collateralized Debt Obligations (CDOs) 215

Effects of the 2007–2009 Financial Crisis 216

INSIDE THE FED Was the Fed to Blame for the Housing Price Bubble? 217

GLOBAL The European Sovereign Debt Crisis 220

Height of the 2007–2009 Financial Crisis 221

PART FOUR CENTRAL BANKING AND THE CONDUCT OF MONETARY POLICY

Variations in the Functions and Structures of Central Banks 227

The European Central Bank, the Euro System, and the European System of Central Banks 228

Decision-Making Bodies of the ECB 230

How Monetary Policy is Conducted within the ECB 231

GLOBAL The Importance of the Bundesbank within the ECB 232

GLOBAL Are Non-Euro Central Banks Constrained by

Difference between the ECB and the Fed 234

Structure of Central Banks of Larger Economies 236

Structure and Independence of Central Banks of

The Trend Toward Greater Independence 241

Contents in Detail 15

How Fed Actions Affect Reserves in the Banking System 245

The Market for Reserves and the Federal Funds Rate 247 Demand and Supply in the Market for Reserves 247 How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate 249

CASE How the Federal Reserve’s Operating Procedures Limit

Discount Policy and the Lender of Last Resort 255

Nonconventional Monetary Policy Tools and Quantitative Easing 258

INSIDE THE FED Fed Lending Facilities During the Global Financial Crisis 260

Quantitative Easing Versus Credit Easing 261

The Price Stability Goal and the Nominal Anchor 266

Should Price Stability Be the Primary Goal of Monetary Policy? 270

Price Stability as the Primary, Long-Run Goal of Monetary Policy 271

GLOBAL The European Central Bank’s Monetary Policy Strategy 272

INSIDE THE FED Ben Bernanke and the Federal Reserve’s

Should Central Banks Respond to Asset-Price Bubbles?

Lessons from the Global Financial Crisis 275

The Debate over Whether Central Banks Should Try to Pop Bubbles 277

THE PRACTICING MANAGER Using a Fed Watcher 279

PART FIVE FINANCIAL MARKETS

CASE Discounting the Price of Treasury Securities to Pay the Interest 292

MINI-CASE Treasury Bill Auctions Go Haywire 295

GLOBAL Ironic Birth of the Eurodollar Market 302

Contents in Detail 17

Treasury Inflation-Protected Securities (TIPS) 313

CASE The 2007–2009 Financial Crisis and the Bailout of Fannie

The Generalized Dividend Valuation Model 340

CASE The 2007–2009 Financial Crisis and the Stock Market 346

CASE The September 11 Terrorist Attack, the Enron Scandal, and the Stock Market 346

MINI-CASE History of the Dow Jones Industrial Average 347

Characteristics of the Residential Mortgage 356

E-FINANCE Borrowers Shop the Web for Mortgages 366

Contents in Detail 19

FOLLOWING THE FINANCIAL NEWS Foreign Exchange Rates 377

Why the Theory of Purchasing Power Parity Cannot

Factors That Affect Exchange Rates in the Long Run 381 Exchange Rates in the Short Run: A Supply and Demand Analysis 383

Equilibrium in the Foreign Exchange Market 385

Shifts in the Demand for Domestic Assets 385 Recap: Factors That Change the Exchange Rate 388

CASE Effect of Changes in Interest Rates on

CASE The Global Financial Crisis and the Dollar 394

THE PRACTICING MANAGER Profiting from Foreign Exchange Forecasts 395

Comparing Expected Returns on Domestic and Foreign Assets 399

Intervention in the Foreign Exchange Market 404 Foreign Exchange Intervention and Reserves in the Banking System 404

INSIDE THE FED A Day at the Federal Reserve Bank of New York’s

GLOBAL Will the Euro Survive? 414

CASE The Foreign Exchange Crisis of September 1992 416

THE PRACTICING MANAGER Profiting from a Foreign Exchange Crisis 418

CASE How Did China Accumulate over $3 Trillion of International Reserves? 419

Should the IMF Be an International Lender of Last Resort? 421

PART SIX THE FINANCIAL INSTITUTIONS INDUSTRY

Chapter 17 Banking and the Management of Financial

Liquidity Management and the Role of Reserves 432

THE PRACTICING MANAGER Strategies for Managing Bank Capital 439

CASE How a Capital Crunch Caused a Credit Crunch During the

Trading Activities and Risk Management Techniques 441

CONFLICTS OF INTEREST Barings, Daiwa, Sumitomo, Société Générale, and J.P Morgan Chase: Rogue Traders and the Principal–Agent Problem 442

Recent Trends in Bank Performance Measures 446

Asymmetric Information as a Rationale for Financial Regulation 452

GLOBAL The Spread of Government Deposit Insurance Throughout the World: Is This a Good Thing? 454

Financial Supervision: Chartering and Examination 459

GLOBAL Where Is the Basel Accord Heading After the Global Financial Crisis? 460

Macroprudential Versus Microprudential Supervision 466

E-FINANCE Electronic Banking: New Challenges for Bank Regulation 466

GLOBAL International Financial Regulation 468 Banking Crises Throughout the World in Recent Years 471

The Dodd-Frank Wall Street Reform and Consumer

What Can Be Done About the Too-Big-to-Fail Problem? 474

Historical Development of the Banking System 480

Financial Innovation and the Growth of the Shadow Banking System 482 Responses to Changes in Demand Conditions: Interest Rate Volatility 483 Responses to Changes in Supply Conditions: Information Technology 484

E-FINANCE Will “Clicks” Dominate “Bricks” in the Banking Industry? 486

E-FINANCE Why Are Scandinavians So Far Ahead of Americans

in Using Electronic Payments and Online Banking? 487

E-FINANCE Are We Headed for a Cashless Society? 488 Securitization and the Shadow Banking System 489

MINI-CASE Bruce Bent and the Money Market Mutual Fund Panic of 2008 493

THE PRACTICING MANAGER Profiting from a New Financial Product:

Financial Innovation and the Decline of Traditional Banking 495

E-FINANCE Information Technology and Bank Consolidation 503 The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 503 What Will the Structure of the U.S Banking Industry Look Like in the Future? 504 Are Bank Consolidation and Nationwide Banking Good Things? 504 Separation of the Banking and Other Financial Service Industries 505

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999:

Implications for Financial Consolidation 506

MINI-CASE The Global Financial Crisis and the Demise of Large, Free-Standing

Separation of Banking and Other Financial Services Industries

Contents in Detail 23

CASE Calculating a Mutual Fund’s Net Asset Value 521

Conflicts of Interest in the Mutual Fund Industry 533

CONFLICTS OF INTEREST Many Mutual Funds Are Caught Ignoring

CONFLICTS OF INTEREST SEC Survey Reports Mutual Fund Abuses Widespread 535

CONFLICTS OF INTEREST The Subprime Financial Crisis and

Chapter 22 Investment Banks, Security Brokers and

MINI-CASE Example of Using the Limit-Order Book 582

Relationship Between Securities Firms and Commercial Banks 584

E-FINANCE Venture Capitalists Lose Focus with Internet Companies 589

PART SEVEN THE MANAGEMENT OF FINANCIAL INSTITUTIONS

Example of a Nonbanking Financial Institution 607 Some Problems with Income Gap and Duration Gap Analyses 609

THE PRACTICING MANAGER Strategies for Managing Interest-Rate Risk 610

THE PRACTICING MANAGER Hedging Interest-Rate Risk

FOLLOWING THE FINANCIAL NEWS Financial Futures 619

THE PRACTICING MANAGER Hedging with Financial Futures 620 Organization of Trading in Financial Futures Markets 622 Globalization of Financial Futures Markets 622 Explaining the Success of Futures Markets 623

MINI-CASE The Hunt Brothers and the Silver Crash 625

THE PRACTICING MANAGER Hedging Foreign Exchange Risk with

Hedging Foreign Exchange Risk with Forward Contracts 626 Hedging Foreign Exchange Risk with Futures Contracts 627

FOLLOWING THE FINANCIAL NEWS Stock Index Futures 628

THE PRACTICING MANAGER Hedging with Stock Index Futures 629

THE PRACTICING MANAGER Hedging with Interest-Rate Swaps 638

Financial Intermediaries in Interest-Rate Swaps 640

Contents on the Web

Dynamics of Financial Crises in Emerging Market Economies W-2

Stage Three: Full-Fledged Financial Crisis W-6

Financial Liberalization/Globalization Mismanaged W-7

Perversion of the Financial Liberalization/Globalization Process:

Chaebols and the South Korean Crisis W-9

Stock Market Decline and Failure of Firms Increase Uncertainty W-10

Adverse Selection and Moral Hazard Problems Worsen and the

Final Stage: Currency Crisis Triggers Full-Fledged Financial Crisis W-11

CASE The Argentine Financial Crisis, 2001–2002 W-13

Adverse Selection and Moral Hazard Problems Worsen W-14

Currency Crisis Triggers Full-Fledged Financial Crisis W-16

Preventing Emerging Market Financial Crises W-18

Beef Up Prudential Regulation and Supervision of Banks W-18

GLOBAL When an Advanced Economy Is Like an Emerging Market Economy:

Encourage Disclosure and Market-Based Discipline W-20

Sequence Financial Liberalization W-20

The following updated chapters and appendices are available on our Companion Website

at www.pearsonglobaleditions.com/Mishkin

Savings and Loan Associations W-24 Mutual Savings Banks and Savings and Loans Compared W-24 Savings and Loans in Trouble: The Thrift Crisis W-25 Later Stages of the Crisis: Regulatory Forbearance W-26 Competitive Equality in Banking Act of 1987 W-27 Political Economy of the Savings and Loan Crisis W-28 Principal–Agent Problem for Regulators and Politicians W-28

CASE Principal–Agent Problem in Action: Charles Keating and the

Savings and Loan Bailout: Financial Institutions Reform, Recovery, and

The Future of the Savings and Loan Industry W-36

Advantages and Disadvantages of Credit Unions W-44

Business (Commercial) Finance Companies W-52

Contents on the Web 29

Chapter 4 Appendix 2: Applying the Asset Market Approach to a

Chapter 4 Appendix 4: Supply and Demand in the Market

A Note from Frederic Mishkin

When I took leave from Columbia University in September 2006 to take a position as

a member (governor) of the Board of Governors of the Federal Reserve System, I never imagined how exciting—and stressful—the job was likely to be How was I to know that, as Alan Greenspan put it, the world economy would be hit by a “once-in-a-century credit tsunami,” the global financial crisis of 2007–2009? When I returned

to Columbia in September 2008, the financial crisis had reached a particularly lent stage, with credit markets completely frozen and some of our largest financial institutions in very deep trouble The global financial crisis, which has been the worst financial crisis the world has experienced since the Great Depression, has completely changed the nature of financial markets and institutions

viru-Given what has happened, the study of financial markets and institutions has become particularly exciting I hope that students reading this book will have as much fun learning from it as we have had in writing it

August 2016

What’s New in the Ninth Edition

In addition to the expected updating of all data whenever possible, there is major new material in every part of the text

New Material on Financial Markets and Institutions

In light of ongoing research and changes in financial markets and institutions, we have added the following material to keep the text current:

Europe, and Japan (Chapter 3)

United States (Chapter 4)

Preface

• A new chapter on major central banks around the world, their origins, ture, and functions (Chapter 9)

(Chapter 19)

New Material on Monetary Policy

In the aftermath of the global financial crisis, there have been major changes in the way central banks conduct monetary policy This has involved the following new material

central banks (Chapter 10)

Appendices on the Web

allowed us to retain and add new material for the book by posting content online

The appendices include:

Chapter 4: Models of Asset PricingChapter 4: Applying the Asset Market Approach to a Commodity Market: The Case

of GoldChapter 4: Loanable Funds FrameworkChapter 4: Supply and Demand in the Market for Money: The Liquidity Preference Framework

Chapter 18: Banking Crises Throughout the WorldChapter 24: More on Hedging with Financial DerivativesInstructors can either use these appendices in class to supplement the material

in the textbook or recommend them to students who want to expand their edge of the financial markets and institutions field

knowl-Hallmarks

Although this text has undergone a major revision, it retains the basic hallmarks that make it the best-selling textbook on financial markets and institutions The ninth

edition of Financial Markets and Institutions is a practical introduction to the

workings of today’s financial markets and institutions Moving beyond the

descrip-tions and definidescrip-tions provided by other textbooks in the field, Financial Markets and Institutions encourages students to understand the connection between the

theoretical concepts and their real-world applications By enhancing students’ lytical abilities and concrete problem-solving skills, this textbook prepares students

stu-dents’ thinking These principles include:

Asymmetric information (agency) problemsConflicts of interest

Transaction costsSupply and demandAsset market equilibriumEfficient markets

Measurement and management of risk

that emphasize the financial practitioner’s approach to financial markets and institutions

material more easily

man-ner they prefer

financial newspaper

data and examples

telecommuni-cations) technology on the financial system The text makes extensive use

of the Internet with Web exercises, Web sources for charts and tables, and Web references in the margins It also features special “E-Finance” boxes that explain how changes in technology have affected financial markets and institutions

Flexibility

There are as many ways to teach financial markets and institutions as there are instructors Thus, there is a great need to make a textbook flexible in order to satisfy the diverse needs of instructors, and that has been a primary objective in writing this book This textbook achieves this flexibility in the following ways:

chapters or sections of chapters can be assigned or omitted according to instructor preferences For example, Chapter 2 introduces the financial sys-tem and basic concepts such as transaction costs, adverse selection, and moral hazard After covering Chapter 2, an instructor can decide to teach a more detailed treatment of financial structure and financial crises using chapters

in Part 3 of the text, or cover specific chapters on financial markets or cial institutions in Parts 4 or 5 of the text, or the instructor can skip these chapters and take any of a number of different paths

finan-• The approach to internationalizing the text using separate, marked tional sections within chapters and separate chapters on the foreign exchange market and the international monetary system is comprehensive yet flexible

interna-Although many instructors will teach all the international material, others will choose not to Instructors who want less emphasis on international topics can easily skip Chapter 15 (on the foreign exchange market) and Chapter 16 (on the international financial system)

of financial institutions, are self-contained and so can be skipped without loss

of continuity Thus, an instructor wishing to teach a less managerially oriented course, who might want to focus on public policy issues, will have no trouble doing so Alternatively, Part 7 can be taught earlier in the course, immediately after Chapter 17 on bank management

The course outlines listed next for a semester teaching schedule illustrate how this book can be used for courses with a different emphasis More detailed informa-tion about how the text can offer flexibility in your course is available in the

Instructor’s Manual.

Financial markets and institutions emphasis: Chapters 1–5, 7–8, 11–13,

17–19, and a choice of five other text chapters

Financial markets and institutions with international emphasis:

Chapters 1–5, 7–8, 11–13, 15–19, and a choice of three other text chapters

Managerial emphasis: Chapters 1–5, 17–19, 23–24, and a choice of eight

other text chapters

Public policy emphasis: Chapters 1–5, 7–10, 17–18, and a choice of seven

other text chapters

Pedagogical Aids

A textbook must be a solid motivational tool To this end, we have incorporated a wide variety of pedagogical features

1 Chapter Previews at the beginning of each chapter tell students where the

chapter is heading, why specific topics are important, and how they relate to other topics in the book

2 Cases demonstrate how the analysis in the book can be used to explain many

important real-world situations

3 “The Practicing Manager” is a set of special cases that introduce students to

real-world problems that managers of financial institutions have to solve

4 Numerical Examples guide students through solutions to financial problems

using formulas, time lines, and calculator key strokes

5 “Following the Financial News” boxes introduce students to relevant news

articles and data that are reported daily in financial news sources and explain how to read them

6 “Global” boxes include interesting material with an international focus.

7 “Inside the Fed” boxes give students a feel for what is important in the

opera-tion and structure of the Federal Reserve System

8 “E-Finance” boxes relate how changes in technology have affected financial

markets and institutions

11 Summary Tables are useful study aids for reviewing material.

12 Key Statements are important points that are set in boldface type so that

students can easily find them for later reference

13 Graphs with captions, numbering over 60, help students understand the

inter-relationship of the variables plotted and the principles of analysis

14 Summaries at the end of each chapter list the chapter’s main points.

15 Key Terms are important words or phrases that appear in boldface type

when they are defined for the first time and are listed at the end of each chapter

16 End-of-Chapter Questions help students learn the subject matter by applying

economic concepts and feature a special class of questions that students find particularly relevant, titled “Predicting the Future.”

17 End-of-Chapter Quantitative Problems, numbering over 250, help students

to develop their quantitative skills

18 Web Exercises encourage students to collect information from online sources

or use online resources to enhance their learning experience

19 Web Sources report the URL source of the data used to create the many tables

and charts

20 Marginal Web References point the student to Web sites that provide

informa-tion or data that supplement the text material

21 Glossary at the back of the book defines all the key terms.

22 Full Solutions to the Questions and Quantitative Problems appear

in the Instructor’s Manual and on the Instructor’s Resource Center at

www.pearsonglobaleditions.com/Mishkin Professors have the flexibility

to share the solutions with their students as they see fit

Supplementary Materials

The ninth edition of Financial Markets and Institutions includes the most

com-prehensive program of supplementary materials of any textbook in its field These items are available to qualified domestic adopters but in some cases may not be available to international adopters These include the following items:

For the Professor

The demands for good teaching at business schools have increased dramatically in

recent years To meet these demands, the ninth edition of Financial Markets and Institutions includes the most comprehensive program of supplementary materials

of any textbook in its field that should make teaching the course substantially easier

1 Instructor’s Manual: This manual, prepared by the authors, includes

chap-ter outlines, overviews, teaching tips, and complete solutions to questions and problems in the text

2 PowerPoint: Prepared by John Banko (University of Florida) The presentation,

which contains lecture notes and the complete set of figures and tables from

the textbook, contains more than 1,000 slides that comprehensively outline the major points covered in the text.

3 Test Bank: Updated and revised for the ninth edition, the Test Bank

com-prises over 2,500 multiple-choice, true-false, and essay questions All of the questions from the Test Bank are available in computerized format for use in the TestGen software The TestGen software is available for both Windows and Macintosh systems

4 Mishkin/Eakins Companion Website ( www.pearsonglobaleditions.com /Mishkin) features Web chapters on financial crises in emerging economies, savings associations and credit unions, and another on finance companies, Web appendices, and links to relevant data sources and Federal Reserve Web sites

For the Student

1 Mishkin/Eakins Companion Website ( www.pearsonglobaleditions.com /Mishkin) includes Web chapters on financial crises in emerging economies, savings associations and credit unions, and another on finance companies, Web appendices, glossary flash cards, and links from the textbook

Preface 37

Ibrahim J Affanen, Indiana University of Pennsylvania

Vikas Agarwal, Georgia State University

Senay Agca, George Washington University

Aigbe Akhigbe, University of Akron

Ronald Anderson, University of Nevada–Las Vegas

Bala G Arshanapalli, Indiana University Northwest

Christopher Bain, Ohio State University

James C Baker, Kent State University

John Banko, University of Central Florida

Mounther H Barakat, University of Houston–Clear Lake

Joel Barber, Florida International University

Thomas M Barnes, Alfred University

Marco Bassetto, Northwestern University

Dallas R Blevins, University of Montevallo

Matej Blusko, University of Georgia

Paul J Bolster, Northeastern University

Lowell Boudreaux, Texas A&M University–Galveston

Deanne Butchey, Florida International University

Mitch Charklewicz, Central Connecticut State University

Yea-Mow Chen, San Francisco State University

N K Chidambaran, Tulane University

Wan-Jiun Paul Chiou, Shippensburg University

Jeffrey A Clark, Florida State University

Robert Bruce Cochran, San Jose State University

William Colclough, University of Wisconsin–La Crosse

James Conover, University of North Texas

Elizabeth Cooperman, University of Baltimore

Brian Davis, Pennsylvania State University

Carl Davison, Mississippi State University

Cris de la Torre, University of Northern Colorado

Erik Devos, Ohio University at SUNY Binghamton

David Dieterle, Walsh Colege

Alan Durell, Dartmouth College

Franklin R Edwards, Columbia University

Marty Eichenbaum, Northwestern University

Elyas Elyasiani, Temple University

Edward C Erickson, California State University–Stanislaus

Kenneth Fah, Ohio Dominican College

J Howard Finch, Florida Gulf Coast University

E Bruce Fredrikson, Syracuse University

Cheryl Frohlich, University of North Florida

James Gatti, University of Vermont

Steven Gattuso, Canisius College

Paul Girma, State University of New York–New Paltz

Susan Glanz, St John’s University

Gary Gray, Pennsylvania State University Wei Guan, University of South Florida–St Petersburg Charles Guez, University of Houston

Beverly L Hadaway, University of Texas John A Halloran, University of Notre Dame Billie J Hamilton, East Carolina University John H Hand, Auburn University

Jeffery Heinfeldt, Ohio Northern University Tahereh Hojjat, DeSales University Don P Holdren, Marshall University Adora Holstein, Robert Morris College Sylvia C Hudgins, Old Dominion University Jerry G Hunt, East Carolina University Boulis Ibrahim, Heroit-Watt University William E Jackson, University of North Carolina–Chapel Hill Joe James, Sam Houston State University

Melvin H Jameson, University of Nevada–Las Vegas Kurt Jessewein, Texas A&M International University Jack Jordan, Seton Hall University

Tejendra Kalia, Worcester State College Taeho Kim, Thunderbird: The American Graduate School of International Management

Taewon Kim, California State University–Los Angeles Elinda Kiss, University of Maryland

Glen A Larsen, Jr., University of Tulsa James E Larsen, Wright State University Rick LeCompte, Wichita State University Baeyong Lee, Fayetteville State University Boyden E Lee, New Mexico State University Adam Lei, Midwestern State University Kartono Liano, Mississippi State University Hao Lin, California State University, Sacramento John Litvan, Southwest Missouri State

Richard A Lord, Georgia College Robert L Losey, American University Anthony Loviscek, Seton Hall University James Lynch, Robert Morris College Judy E Maese, New Mexico State University William Mahnic, Case Western Reserve University Inayat Mangla, Western Michigan University William Marcum, Wake Forest University David A Martin, Albright College Lanny Martindale, Texas A&M University Joseph S Mascia, Adelphi University Khalid Metabdin, College of St Rose

Acknowledgments

As always in so large a project, there are many people to thank Our special tude goes to Bruce Kaplan, former economics editor at HarperCollins; Donna Battista and Adrienne D’Ambrosio, my former finance editors; Christina Masturzo,

grati-my current finance editor at Pearson; and Jane Tufts and Agrati-my Fleischer, our former development editors We also have been assisted by comments from my colleagues

at Columbia and from my students

In addition, we have been guided in this edition and its predecessors by the thoughtful comments of outside reviewers and correspondents Their feedback has made this a better book In particular, we thank:

Robert McLeod, University of Alabama

David Milton, Bentley College

A H Moini, University of Wisconsin–Whitewater

Russell Morris, Johns Hopkins University

Chee Ng, Fairleigh Dickinson University

Srinivas Nippani, Texas A&M Commerce

Terry Nixon, Indiana University

William E O’Connell, Jr., The College of William and Mary

Masao Ogaki, Ohio State University

Sam Olesky, University of California–Berkeley

Evren Ors, Southern Illinois University

Coleen C Pantalone, Northeastern University

Scott Pardee, University of Chicago

Ohaness Paskelian, University of Houston

James Peters, Fairleigh Dickinson University

Fred Puritz, State University of New York–Oneonta

Mahmud Rahman, Eastern Michigan University

Anoop Rai, Hofstra University

Mitchell Ratner, Rider University

David Reps, Pace University–Westchester

Terry Richardson, Bowling Green State University

Harvey Rosenblum, Southern Methodist University

Jack Rubens, Bryant College

Charles B Ruscher, James Madison University William Sackley, University of Southern Mississippi Kevin Salyer, University of California–Davis Siamack Shojai, Manhattan College Javadi Siamak, Oklahoma University Donald Smith, Boston University Kenneth Smith, University of Texas–Dallas Sonya Williams Stanton, Ohio State University Michael Sullivan, Florida International University Rick Swasey, Northeastern University

Anjan Thackor, University of Michigan Janet M Todd, University of Delaware James Tripp, Western Illinois University Carlos Ulibarri, Washington State University Emre Unlu, University of Nebraska–Lincoln John Wagster, Wayne State University Bruce Watson, Wellesley College David A Whidbee, California State University–Sacramento Arthur J Wilson, George Washington University

Shee Q Wong, University of Minnesota–Duluth Criss G Woodruff, Radford University

Tong Yu, University of Rhode Island Dave Zalewski, Providence College

Finally, I want to thank my wife, Sally, my son, Matthew, and my daughter, Laura, who provide me with a warm and happy environment that enables me to do

my work, and my father, Sydney, now deceased, who a long time ago put me on the path that led to this book

Frederic S Mishkin

I would like to thank Rick Mishkin for his excellent comments on my tions By working with Rick on this text, not only have I gained greater skill as a writer, but I have also gained a friend I would also like to thank my wife, Laurie, for patiently reading each draft of this manuscript and for helping make this my best work Through the years, her help and support have made this aspect of my career possible

contribu-Stanley G Eakins

Global Edition Acknowledgments

We want to thank the following people for their contributions:

Monal Abdel-Baki, Durban University

Nino Davitaya, Financial Advisor, Tbilisi, Georgia

Catherine Lions, Umeå University

We would also like to thank the following people for reviewing the content and sharing their insightful comments and suggestions:

Mohammad Elgammal, Qatar University

Stefan Fink, University of Linz

Dan Li, University of Hong Kong Onur Kemal Tosun, University of Warwick

Frederic S Mishkin is the Alfred

Lerner Professor of Banking and Financial Institutions at the Graduate School of Business,

C o l u m b i a U n i v e r s i t y F r o m September 2006 to August 2008,

he was a member (governor) of the Board of Governors of the Federal Reserve System.

He is also a research associate

at the National Bureau of Economic Research and past president of the Eastern Economics Association

Since receiving his Ph.D from the Massachusetts Institute of Technology in 1976, he has taught at

the University of Chicago, Northwestern University, Princeton

University, and Columbia University He has also received an

honorary professorship from the People’s (Renmin) University of

China From 1994 to 1997, he was executive vice president and

director of research at the Federal Reserve Bank of New York and

an associate economist of the Federal Open Market Committee of

the Federal Reserve System.

Professor Mishkin’s research focuses on monetary policy and its impact on financial markets and the aggregate economy He is

the author of more than 20 books, including Macroeconomics:

Policy and Practice, Second Edition (Pearson, 2015); The

Economics of Money, Banking and Financial Markets,

Eleventh Edition (Pearson, 2016); Monetary Policy Strategy

(MIT Press, 2007); The Next Great Globalization: How

Disadvantaged Nations Can Harness Their Financial

Systems to Get Rich (Princeton University Press, 2006);

Inflation Targeting: Lessons from the International

Experience (Princeton University Press, 1999); Money, Interest Rates, and Inflation (Edward Elgar, 1993); and A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient Markets Models (University of

Chicago Press, 1983) In addition, he has published more than

200 articles in such journals as American Economic Review,

Journal of Political Economy, Econometrica, Quarterly Journal of Economics, Journal of Finance, Journal of Applied Econometrics, Journal of Economic Perspectives,

and Journal of Money Credit and Banking.

Professor Mishkin has served on the editorial board of the

American Economic Review and has been an associate editor

at the Journal of Business and Economic Statistics, Journal

of Applied Econometrics, Journal of Economic Perspectives, Journal of Money, Credit and Banking, and Journal of International Money and Finance; he also served as the edi-

tor of the Federal Reserve Bank of New York’s Economic Policy

Review He is currently an associate editor (member of the

edi-torial board) at six academic journals, including International

Finance; Finance India; Emerging Markets, Finance and Trade; Review of Development Finance, Borsa Economic Review, and PSU Research Review He has served as a senior

fellow to at the Federal Deposit Insurance Corporation’s Center for Banking Research and has been a consultant to the Board of Governors of the Federal Reserve System, the World Bank, and the International Monetary Fund, as well as to many central banks throughout the world He was also a member of the International Advisory Board to the Financial Supervisory Service of South Korea and an adviser to the Institute for Monetary and Economic Research at the Bank of Korea He is currently a member of the Economic Advisory Panel and the Monetary Policy Advisory Panel

of the Federal Reserve Bank of New York.

About the Authors

Stanley G Eakins has notable

experience as a financial ner, serving as vice president and comptroller at the First National Bank of Fairbanks and as a com- mercial and real estate loan officer

practitio-A founder of the Denali Title and Escrow Agency, a title insurance company in Fairbanks, Alaska, he also ran the operations side of a bank and was the chief finance officer for a multimillion-dollar construction and development company.

Professor Eakins received his Ph.D from Arizona State University He is the Dean for the College of Business at East Carolina University His research is focused primarily on the role

of institutions in corporate control and how they influence ment practices He is also interested in integrating multimedia tools into the learning environment and has received grants from East Carolina University in support of this work.

invest-A contributor to journals such as the Quarterly Journal of

Business and Economics, the Journal of Financial Research,

and the International Review of Financial Analysis, Professor Eakins is also the author of Corporate Finance Online (CFO)

(Pearson, 2018), a multimedia online text designed from the ground up for electronic delivery.